How to Vet a Sale-Leaseback Buyer

Your leverage is greatest before you sign a letter of intent with an exclusivity clause. After that, you have usually agreed to stop talking to others, and the buyer has what it needs to spend time on you at no risk of competition. So this work should be done with your shortlist, while you still have other bidders.

Our guide on choosing the right buyer covers what kind of buyer to look for and how to weigh it against price. This guide is the follow-through: how to confirm that what a buyer tells you is true.

One title company's list of reasons commercial deals fail includes a buyer who cannot cover the gap between the price and the loan, investors who withdraw, and lender problems. Buyers commonly ask for financing, inspection and appraisal contingencies, each of which can be a way out. So pin down how the purchase will actually be funded.

• All-equity buyer: ask where the capital sits. A fund should be able to explain how much committed capital remains and whether it can be used for this deal. An all-equity buyer needs no mortgage lender's approval, which can remove one source of delay and renegotiation. Verify the claim rather than accepting it.
• Buyer using a loan: ask for the lender's name, the status of the loan and the loan terms that could affect you. Ask whether the lender has seen your lease terms. A lender often has a say in landlord decisions and in insurance or condemnation proceeds after closing.
• Buyer raising capital deal by deal: ask whether the equity has been committed or still has to be raised. Ask what happens if it is not.
• Buyer reinvesting from a property sale: ask whether its timing depends on another transaction, and what happens if that slips.

Ask about approvals too. Some investors take a deal to their investment committee after a letter of intent is signed and complete underwriting then. That is ordinary, but you should know what the committee has and has not seen, and how often it declines deals that reach that stage.

A long list of letters of intent tells you little. What you want is evidence of closed transactions similar to yours.

• A list of recent closed purchases, with property type, approximate size and location. Check some of them yourself in public records if you can.
• Experience with your type of building. An investor who has owned manufacturing plants or medical buildings is less likely to be alarmed by ordinary features of yours.
• Experience as a landlord to a company like yours, not simply as a buyer of properties.
• How many deals it has signed under a letter of intent and not closed, and why.
• Its typical deal size, compared with yours. A deal much smaller than its usual size may get little attention; one much larger may stretch it. Some investors have revenue or profitability minimums, so ask about those early.

Compare what a buyer tells you with what public filings, county records and other sellers tell you. A small mismatch can be a misunderstanding. A pattern is information.

Ask each finalist for two kinds of reference: sellers it bought from and tenants it currently owns buildings for. Ask to choose from a list, not to be handed the two happiest ones. Then call.

• ✓Was the price in the letter of intent the same at closing? If not, what changed?
• ✓Did the buyer raise anything late that it could have raised earlier?
• ✓Did it keep to the diligence and closing dates it agreed?
• ✓How long did your attorneys take to settle the lease, and did the buyer's form change much?
• ✓After closing, how quickly did it answer requests for consent?
• ✓Who do you actually deal with, and has that person changed?
• ✓Has the buyer funded an expansion or capital project for you? How did that go?
• ✓What happened when you needed flexibility, or had a bad quarter?
• ✓Has it sold the building? If so, how did it treat you during the sale?
• ✓Knowing what you know now, would you sell to this buyer again?

Selling to a buyer does not mean you will keep that buyer as a landlord. Some investors plan to hold for the long term. Others plan to resell, and as a lease shortens, the buyer pool and pricing can change, so a seller of your building is thinking about its exit. Neither is wrong, but you want to know.

• Ask directly about the intended hold period, and how the buyer's fund life or investor commitments affect it.
• Ask how many similar buildings it has sold in recent years, and to whom.
• Ask whether your lease would limit a sale to certain types of buyers, and whether the buyer would agree to that. Some sellers also ask for a right of first offer, though repurchase rights need review by your CPA.
• Assume the lease is what will protect you if the building changes hands. Your lease should stand on its own whoever the owner is.

A buyer's attorneys may run bankruptcy, judgment, tax lien and litigation searches on you and your principals, and will confirm that your entities are properly formed and in good standing. It is reasonable to run similar searches on them. Your attorney can help.

1. Identify the entity that will actually sign the purchase agreement and lease, and its parent.
2. Check its registration and good standing with the relevant secretary of state.
3. Search court records for litigation with tenants or sellers, and for bankruptcies, judgments and liens.
4. Read what is publicly available, including news coverage and any public company or fund filings.
5. Ask whether the buyer can assign the purchase agreement to an affiliate, and who then stands behind the deposit and the lease obligations.
6. Sign a confidentiality agreement before releasing your financial statements, and share the most sensitive information only with serious finalists.

A buyer that is sound and honest generally does not mind this. Reluctance to name its source of funds or provide references is worth noting.

Vetting takes time at the moment when you are also preparing the building and running your business. TAG works for the seller who becomes the tenant, so we look at each buyer from your side: whether it can close, and whether you want it as your landlord. One client described the process in these terms: